I've often believed that finance, with its rigor and it's a requirement for return on investment was an enemy of innovation. It seems that to request that a new project generate a return on investment is often premature. But, in a recent discussion I had with Luka Mucic, Chief Financial Officer at SAP, I was led to reconsider these ideas.

A member of the Executive Board and Global Managing Board of SAP SE, Luka Mucic is the chief financial officer as well as chief operating officer (COO). He is responsible for all corporate financial activities as well as administration of the company and has served in this function since July 2014. In addition, Luka is responsible as COO for the Process Office of the company.
He began his career at SAP in 1996 as a member of SAP's Corporate Legal department, where he focused on corporate and commercial law. Luka holds a master´s degree in law from the University of Heidelberg, Germany, and a joint executive MBA from ESSEC, France, and Mannheim Business School, Germany.

II/ Yesterday, innovation and finance diverged

The financial function is morphing into being more innovation-friendly
Luka shared with me how finance has evolved as a function in the last 10 to 15 years.
He told me that about 10 years ago, the focus was on reporting cost and revenues across the company. This led to creating financial software that aimed at accounting for every single asset the company owns.
Then, finance has focused more on improving operational efficiency all across the value chain from resource acquisition the distribution.
But, today, we're entering a third phase that is much more innovation-driven than the first two.

III/ Today, innovation and finance converge

Indeed, some factors are leading senior leaders to realize that established companies may lose faster than ever their competitive advantage to novel startups. This has been eloquently voiced by Harvard professor Clayton Christensen, author of The Innovator's Dilemma. Therefore, the grip to control costs is loosening to foster innovation projects.

IV/ Shareholder onboarding

At SAP, the profitability goal used to be the same across all business units. But, this tended to require profitability goals that are too high for new businesses to be met. Therefore, Luka has worked to create business unit specific profitability goals based on market maturity and the expected revenue/profit situation on a mid and long term basis.

This adapts to different business units based on their industrial maturity. An established business unit will have an ambitious profitability goal as its business model has been tested, validated.
But, a business unit that is based on innovation will have a different profitability objective. It needs time to test different business models and growth hypothesis.

So what I find interesting here is the way in which the chief financial officer is encouraging innovation in a large company. Luka mentioned that such a decision led to some conversations with shareholders, as the short-term minded investors tend to be more comfortable with a profitability goal that was shared all across the company.

V/ The Internet of things is spearheading the finance function at the heart of innovation

Indeed, it's always been critical to any chief financial officer's job to help reduce cost all across the value chain. As mentioned earlier this has led to developing reporting software to account for every single asset a company owns. But today, the networked economy with business networks and applications for the internet of things is creating new opportunities to increase cost reduction across the value chain. SAP has entered this field and has acquired the market leading companies in this area, Ariba, Concur and Fieldglass. Their networks are based on different business models than the traditional on premise software applications business that SAP is known for. As a result, these businesses follow different profitability goals than the traditional software business. At the same time, they are crucial for SAP’s future position in the field of the networked economy.
One practical example of the networked economy is the Port of Hamburg. It is one of the busiest ports in Europe. It is using all the land it can use and there is little opportunity for expanding onto new spaces as the city and its suburbs are already crowded. Therefore, the only way to increase capacity is to make better use of existing facilities. This spells increased efficiency. And yet, working and operating a Port often means being subjected all sorts of unpredictable events. Changing weather will slow boats and delay arrivals. This in turn may delay all the other operational activities that depend upon the boat’s arrival at a given time. For example, some trucks may have been scheduled to arrive at the port just in time to pick up raw materials from the boats. These trucks now have to wait and park somewhere which involves using parking spaces.

Trucks are themselves part of a larger logistic chain. They will, therefore, cause other logistic partners to wait through a similar delay. Obviously, weather is a significant factor of variability all across the logistics chain. This is causing under utilization of facilities, which is exactly the opposite of what a Port needs if it wants to realize its full potential.

VI/ Innovation is key to increased operational excellence

So how is the finance function contributing to improving operational efficiency in a business like the port of Hamburg?

Well, it turns out that the emergence of the networked economy, business networks and the internet of things with its connectivity and declining computation prices, creates a possibility to connect every single object to a broad network. Now, as the boat is delayed due to changing weather, then, it would automatically send a signal to all other objects that are involved and the logistics chain. The trucks would be informed of the delay and an intelligent system sends them to a relevant parking spaces. Other partners in the logistic chain would have similar communications and, by the help of the very same system, adjust in real time their operations to the changing circumstances.

This helps to reduce costs. What I find particularly interesting in this example is that innovation, particularly the Internet of things, is helping the financial function perform its job better. It's providing more data and more information to reduce costs. Luka informed me that SAP is developing platforms that are needed to consolidate data from very different sources that are connected to the Internet. And this is a second example of how the finance function is spearheading innovation.

In a follow-up conversation, Luka told me how the financial function is supporting innovation on a day-to-day basis.

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